There are innumerable theories, books and seminars on how to invest. People who are trying to make their savings grow typically look to other “successful” sources to help them cultivate their savings. Many of these sources, however, turn out to be hard to understand and follow, despite how great they sound or much they are recommended. Marketing of the program itself is often the most effective component of too many of them. It advertises the “secrets” or “magical formulas” on how to beat the market and get fabulously rich. Yet, are these real? For most of us the answer is “no”. The reality is that hard working middle class people face a huge financial risk with these promises and dreams. Using these strategies can be simply devastating. Bankruptcy lawyers see these failures all the time. People use their savings, pull out the equity from their homes or even borrow their retirement funds (despite the penalties) in the hope of capitalizing on some currently hot scheme to invest. Then they lose–sometimes everything.
So what to do? You want to get results in making your savings grow without needing to become an expert–taking years of finance courses or learning a whole new vocabulary. There are four simple, yet powerful, guidelines to follow.
1). MAKE LONG TERM INVESTMENTS. The idea is to invest long term. The place to do that is in the stock market. Professor Elizabeth Warren points out that historically the U.S. Stock Market has averaged nearly a 12% return over long runs of time. She indicates that 97% of 5 year periods and 100% of 10 year periods show a profit. In short, the stock market is good for LONG TERM investing. There are constant fluctuations so we only put in money we don’t need for at least 5 years or longer. For example, you can put your retirement fund or young child’s college fund, but not your safety net fund I discussed in previous blogs (i.e. savings of 6 months of Bare Necessity cash for emergenci es).
2). DI VERSIFY YOUR INVESTMENTS. The basic concept is to protect yourself from the ups and downs by buying into the long range growth. Diversification gives you the best results for the least risks. It is a natural principle that the whole is greater than the sum of the parts and, as I mentioned, over time the whole produces a 12% profit. So Professor Warren says the right strategy is buy lots of different stock in lots of different industries.
3). BE FRUGAL. Spend as little as you can on costs. That means, carefully shop for a broker that does not charge much.
4). USE INDEX FUNDS. Finally, put all your money in an investment fund (a/k/a an indexed mutual fund). The index fund is the essence of diversification. It buys stocks from hundreds of companies based on a reasonable priced pre-set formula (not a high priced “specialist” approach). It buys small amounts of stock from all the listed companies on the stock market. Fees are less. And according to Professor Warren, the Index fund outperforms approximately 70-80% of all other stock funds! Your fund will do better than most of the Wall Street brokers.
In Fortune Magazine an anonymous writer summed it up. “By day we write about ‘Six Funds to Buy NOW!’ By night, we invest in sensible index funds. Unfortunately, pro-index fund stories don’t sell magazines.”
Follow these four basic rules and your savings will grow naturally.
*Post theory is primarily derived from the book All Your Worth by Elizabeth Warren & Amelia Tyagi which is highly recommended reading.
Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Southeast Iowa